Capital Value versus Land Value Based Rating

Capital Value versus Land Value Based Rating

Introductory Background

Perhaps there are a few things to explain first.

On your rate demands there are two authorities rating you – Waimakariri District Council and Environment Canterbury (Canterbury Regional Council).  The latter rates you on your capital value.

In the Waimakariri District, we have a large number of targeted rates.  These apply to specific areas only and are usually because there is an easily defined service going to one particular area.  For instance, all water rates are like that and they vary markedly – the Kaiapoi water rate is much lower than the Rangiora rate because the costs of getting water to Kaiapoi properties are much lower.

These targeted rates are usually charged as uniform charges, i.e. each property pays the same charge. Every property in Woodend pays the same water charge, no matter what its value or size. The main exceptions to this for targeted rates are the drainage rates that many areas pay.

This means that any change in rating can cause quite different effects in different parts of the District.  Rangiora, Oxford and Summerhill are experiencing much sharper rate rises than many because of the introduction of new water sources for those areas.  Tuahiwi doesn’t have a water supply but is about to get one and will have a similar experience.

As well as these targeted uniform charges, there are some uniform charges across the District – a uniform annual general charge that is part of the general rates, and a uniform roading charge.  There have been two of the latter up until now, one for rural and the other for the five main towns (i.e. including Pegasus), but the Council as part of its rating review has decided make that one a single charge across the district.

There are other across-the-District uniform charges, particularly for community services such as libraries, swimming pools, community buildings and the Canterbury Museum.  Parks and reserves are paid for by two uniform charges, for urban and rural areas respectively.  

In our townships, about three-quarters of rates paid are uniform charges, in rural areas, a bit more than half. It is the residual that is currently subject to land value rating and what this debate is about.

Capital Value versus Land Value

(1) District Population Growth

One of the main reasons for the Council adopting rating based on capital value is that when new subdivisions occur, and there are good examples happening right now in a number of places in the District, the developed properties add proportionately more to the district’s total capital value than the new land values add to the total land value.  This means that under capital value rating, those new properties pay a higher proportion of the total rates collected across the district than they would under land value.  These ease the burden on the current 22,000 or so ratepayers and direct the costs associated with growth more toward those properties that are causing the growth.

An example of population growth incurring new costs on the community a few years ago was the major upgrade done to the southern end of Tram Road.  The southern part of the District between Clarkville and West Eyreton has seen major growth in recent times but in my view the rest of the District had to pay too much for that work.  Capital value rating would have meant that the newer areas in that and other parts of the District would have paid a higher proportion of the cost of the upgrade.

Another roading or traffic issue that is obvious to many is that we have a growing problem in Southbrook that is going to have to be dealt with.

We are anticipating that the district’s population will grow by 25% in the next ten years. We need to ease the potential burden on current ratepayers and do it quickly.

(2) Inequity in the Current System

Land value rating means that property with large areas of land, as with farms, pay larger amounts of rates.  Our farms are paying large amounts of rates – anything from $5000 to beyond $40 000 per year.  Rates in the $10 000 to $25 000 are not uncommon in farming areas.

Those farms get the same services as their small-block neighbours who typically, under land value, pay in the $1100 to $1500 area. (Please don’t compare those amounts with town properties, which will pay larger rates but also include water, sewer, etc charges.)

The contrast between high- and low-rated properties is much greater in the rural areas than in the urban areas because a higher proportion of total rates are rates on property value in the countryside than in the towns (see my introductory remarks above).  Town rates have a higher uniform-charge component.

 Submitters in the recent consultation process argued that farms can claim back tax and GST because they are businesses.  That is true, and so can some small-block holders (although not the majority).  Even after that claim-back, however, they are still left with large sums to pay.  50% of $20 000 is $10 000 and a business would not be able to get 50% back from the IRD.

The roading rate is the major component of rural rates, although we need to remember that 50% of the District’s road maintenance costs come from the Government’s collection of petrol tax and road-user charges.  Some farms, particularly dairy farms, do generate a large amount of road use, but a lot of the others would probably not use the roads any differently from small block holders.  The dairy tankers are an issue over the whole country, of course, but remember they are paying road-user charges.  Generally, also, dairy farms have a high capital input and therefore tend to pay higher rates under capital value rating than do sheep, beef and cropping farms.

(3) Rates Should Match the Services Provided

This is obviously true, but when we have a system where the law requires taxing property value, whether it is land or capital, there are always going to be variations from property to property.  There can be quite different sizes of houses on neighbouring properties and these may mean that the capital-value rates will be different – yet the properties will be getting much the same Council services. The same problem arises with land value however, because neighbouring properties of different sizes are likely to have different land values – but, again, the services received are the same.  It is a self-cancelling argument.

Capital value rating does, of course, include the value of the land.  It is not a rate charged just on improvements.  This means that farms down the road will still pay substantially higher rates than the adjacent small blocks.

We can’t relate services to individual properties because of the variations in both capital and land values from property to property.  What we can do, is relate services to communities, so that properties in, say, North Loburn, will pay as close to the same rates as the law allows for the similar services that they are getting.  Capital value rating brings the extremes of rates closer together than land value and can therefore be argued to be fairer.

(4) Why Not Charge Everybody the Same?

A poll tax is not allowed under NZ law.  Margaret Thatcher tried unsuccessfully in Britain. They also tried in England in the 14th Century and it caused the Peasants’ Revolt!

However, why not do all rating on a per-property uniform charge or series of charges?

The law allows only up to 30% of rates to be covered by uniform charges, excluding charges for specific services, such as water, sewer and refuse collection.  Our uniform general charge and the uniform charges for the likes of roading and community services bring Waimakariri close to 30%.  We can’t impose any more.

There is an argument against uniform charges and it goes like this. Uniform charges form a higher proportion of rates for low value properties than for high value properties (it doesn’t matter whether you have land or capital value rating).  If you accept that people on higher-value properties tend to have higher incomes (yes, I know there are many exceptions), the former pay a higher proportion of their incomes in rates. Uniform charges are often accused of being regressive taxes – the opposite of such progressive taxes as income tax.  The effect of uniform charges is one reason why rates on lower-value properties are higher in Waimakariri than in Christchurch, where there are few uniform charges. There is another reason, but that is outside this discussion.

(5) Does Capital Value Rating Discourage Growth and Penalise those Who Develop Their Properties?

The main reason that it has been pointed out that our neighbours all rate on capital value is not that we should be copying them.  It is to draw attention to the fact that they too been growing under capital value rating.  Selwyn has actually been growing faster than Waimakariri in the last ten years. 

In the 1950s, Kaiapoi Borough went from capital value rating to land value because there were a large number of undeveloped properties in the town that owners were doing nothing with.  They went to land value rating to drive up the rates on unimproved sections and force the owners to build or sell to someone who would. I don’t think those conditions apply to Waimakariri today.

The Loburn-Ashley areas of our District were growing fast in the 1980s.  They were then part of Hurunui County and had capital value rating.

As for the question of penalising people who develop their properties, yes, if you have a high-value building on a relatively low-value area of land you pay more under capital value rating. But the counter-argument is the one above – the person down the road with a larger block of land is currently paying more.  It is a self-cancelling argument, with both having validity.

(6) Lobbying to Change the System

Considerable research has been done at a national level, notably by the Shand Commission of a few years ago.  I think most councillors throughout the country, however, would regard rating as a system of taxation that is no longer meeting the needs of local government.  More than lobbying the government, we also need to encourage our fellow councils throughout the country to continue what they are already doing through Local Government New Zealand, of which all councils are members.  Unfortunately, central government doesn’t seem very interested or regards the matter as too hard.  That doesn’t, of course, mean that we should stop trying.

 (7) Why Did I Vote Against the Change in December?

Unfortunately, there was no Northern Outlook reporter present so the comments I made to the Council at the time were not reported.

There would be many in the community surprised that I had not voted for a change, but I simply felt that the suddenness of the increase for many ratepayers was too great.  I was also concerned that the District is facing huge hurdles in earthquake recovery, in the Ashley Bridge and in dealing with our earthquake-prone community buildings. I had earlier tried to persuade the Council to phase in the change over a period of five years.  The staff assured us that it would be technically quite simple, but I was unable to convince my colleagues.

For me, at the time, I felt how we did it was as important as what we did.

I didn’t support Peter Farrant’s motion this week for two reasons.  It actually would have given very little relief because the major component, the roading rate, was going to remain on capital value.  The other reason came back to really fundamental principles: the council activities covered by the general rate are more related to the people (who generally live and work in buildings) than to the land.

So much for a U-Turn!










4 Responses to “Capital Value versus Land Value Based Rating”

  1. Capital Vs Land Value Rating | Kirstyn Barnett Says:

    […] […]

  2. John Costello Says:

    Do you know why the poll Tax in England failed, if so do you think it would fail here for the same reasons?

    • David Ayers Says:

      As I recall (it is getting to be a long time ago!), the main argument was that a tax in which everyone pays the same hits those on low incomes worse than those on high incomes, because the former have to pay a higher proportion of their incomes. It works the opposite to income tax, where those on higher incomes under a progressive regime pay a higher proportion. Even a “flat” income tax would be seen as fairer in this argument, because at least everyone pays the same proportion.

      The same argument is levelled against uniform property charges within the rates and I believe that is the reason why in New Zealand there are statutory limitations on the use of uniform charges.

      If there were an attempt to introduce a poll tax in New Zealand, I can’t see the arguments being any different to what they were in the UK during Margaret Thatcher’s prime ministership.

  3. Pete Downing Says:

    Hi David

    As I stated in my submission to Council and in the Northern Outlook, on top of all the financial burdens that have been placed on people both present and furture over the coming year or two and the fact that averagely the cost of housing in our district will dramatically increase. This proposal at this time is nothing short of social irresponsibility.

    “Democracy and Consultation”

    Your constituents were consulted and in a democratic fashion responded.

    Our duly elected Council failed to listen to in excess of 75% of submitters. Evidently yourself included. This is not democracy, this will just ensure many of your voters are again brought to their knees financially.

    Surely as a Council and yourself as the Mayor you all must have noted the recent events that have occured across the boundary line where Bob and friends have taken it upon themselves to do as they please when they please without acknowledging their democratic oaths and obligations?

    The time to be aware of the actions we take and how they impact on our community today and in the future is upon us. Never before has such an event impacted on so many in such a dramatic fashion. While the time for change may be right in the future, the current timing could not be worse.

    As an initial submitter I would welcome the opportunity to again submit in March before any final decisions are set in concrete.


    Pete Downing

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